Minimum Wage

Question 1

aims of MW

Answer 1

reduce poverty
reduce pay differentials
reduce exploitation of low paid workers
improve incentives to work

Question 2

living wage

Answer 2

voluntary wage set according to living costs

Question 3

national living wage

Answer 3

for workers over 25

Question 4

standard labour market model

Answer 4

MW reduces labour demand but labour supply is higher therefore more unemployment

Question 5

employment falls bc

Answer 5

substitution effect and scale effect

Question 6

substitution effect

Hicks-Marshall laws of derived demand

Answer 6

degree of substitutability with other factors e.g. capital (is it easy to switch from workers to machines?)
elasticity of supply of other factors e.g. how easily can that capital be supplied?

Question 7

scale effect

Hicks-Marshall laws of derived demand

Answer 7

costs^ - product price^ - product demand falls and so labour demand falls
how much of the cost can be passed onto customers?
elasticity of demand for final product

Question 8

reasons why unemployment DOESN’T increase with MW

Answer 8

(consistent with standard model)

• is labour demand inelastic
• reducing non-wage benefits
• low-skilled sectors where mw doesn’t apply

Question 9

standard model assumptions

Answer 9

• all unskilled workers are paid the same
• firms can employ as ,any workers as they want
• wage = MC = MPL
• employment contracts are complete (i.e. wage does not impact effort)

Question 10

imperfect competition model

Answer 10

(relaxes standard assumptions)
-firms have market power and therefore are wage-setters
-can’t employ as many as they want (bc if they want to hire more they’ll have to pay more)
W < MPL so they have room to ^ wages

Question 11

There is monopsonistic competition in imperfect comp

Answer 11

so workers are paid different amounts int he same market bc each firm offers different wages

Question 12

profit maximising level of employment (imperfect comp)

Answer 12

MC = MRP

Question 13

when MW is introduced

Answer 13

firms will employ up to where MC = Wmin so employment doesn’t fall

Question 14

market imperfections

Answer 14

• workers have imperfect info
• employers can’t observe effort - wages can’t be made contingent on effort
• MW - employees respond with more effort - firms want to hire more bc more productive

Question 15

Labour Discipline Model

Answer 15

employee contracts incomplete
workers choose effort based on wages
higher wage = higher opp cost of losing job so worker chooses to put in that effort
firm offers wage that maximises profit

Question 16

Putty-clay model

Answer 16

firms choose capital/labour mix
LR - new technologies - cheaper
new firms enter with cheaper tech - old firms forced out and those workers lose their jobs

Question 17

effect of MW

Answer 17

effects on employment
further down the line people lose out e.g. CEOs lose profit
prices increase - nominal wage^ but no ^ in real wages

Question 18

does MW fulfil aims?

Answer 18

not always well targeted
many of the poorest don’t work
many low-paid ppl don’t live in poor hhs
low income hhs receive benefits

Question 19

behavioural responses

Answer 19

employment effects
price effects
profit effects